Last week was all about jobs data, and this week inflation figures are all the focus. US CPI is expected to have eased to 2.6% (on an annual basis), which would be trending in the right direction as far as the Fed is concerned, albeit still above their stated 2% target. Nonetheless, a CPI result around the 2.5% or 2.6% level should be enough to usher in a quarter of a percentage point cut by Jerome Powell and co. at next week’s meeting. A larger, 50bp cut is not entirely out of the question, but I suspect that the Fed would want to avoid ‘wielding the axe’ by implementing a larger cut to commence the easing cycle so as not to panic investors.
25bp or 50bp? That is the question heading into this week’s headline economic event where the FOMC are expected to commence their long-awaited rate cutting cycle. Current market pricing suggests that the larger option of a half-a-percentage point cut has firmed as the favourite outcome. But it remains to be seen whether this is the case, and it is entirely feasible that the Fed opts to go with a more cautious 25bp cut to kick-off the rate cutting cycle so as not to alarm markets about what economic perils it potentially sees down the road.
Ahead of the Fed meeting, better than expected US retail sales data (+0.1% vs -0.2% expected vs +0.4% previously) gave the beleaguered USD a lift. The USDJPY rate, which had spent some time dipping below the 140 level earlier this week, recovered to trade around the 142 level during Asian trading hours on Wednesday. Whether or not this recovery in the USD is short lived will depend upon what size interest rate cut we see from the Fed and what their projections are for monetary policy for the rest of 2024 and beyond. Markets are expecting more than 200bp of cuts to occur between now and the end of 2025, and if the Fed’s own projections fall shy of this then the bounce in the USD could extend beyond current levels.
Gold chalked up a new record high price this week on optimism that the Fed may go ‘all in’ this week by cutting 50bp, but the USD recovery on decent retail sales data has caused the gold price to take a mild step back. Having hit $2589 earlier in the week, gold was hovering around the $2572 level on Wednesday ahead of the FOMC meeting. The level of dovishness or otherwise stemming from the Fed meeting and Jerome Powell’s press conference will likely dictate which side of the $2600 level gold trades at in coming days. If the US central bank does decide to go with a more moderately sized rate cut of 25bp then gold could drift back in the direction of $2520-$2540 support zone.
Oil edged higher on the prospect of looser interest rate settings which may improve the energy demand outlook. The US crude price managed to reclaim the $70 level despite Gulf of Mexico production levels still not back to full capacity following Hurricane Francine. Softer Chinese Industrial Production and Retail Sales data this week didn’t do any favours to the oil price but nonetheless the crude price has bounced around $5 higher from the lows of last week. Levels to watch include support at $67.80 and resistance at $71.10.
While the FOMC meeting is the big event this week, there are other potential market-moving events on the calendar including the BOE (Bank of England) meeting on Thursday and the BOJ (Bank of Japan) meeting on Friday. While neither are expected to make a change to interest rates this week, their language and outlooks could impact GBP and JPY currency rates. But firstly, let’s wait and hear what fed Chairman Jerome Powell has to say as this could certainly stir up some volatility between now and the end of the week.
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